Corporate Taxes: Are US Multinational Corporations really paying their fair share?

There has been extensive coverage in this blog about how US Multinational Corporations are not paying their fair share by utilizing Transfer Pricing, Inversions and Earnings Stripping to reduce their effective tax rates below the statutory 35%.

Some examples are: Pfizer tried to invert a couple of times to avoid paying the US tax rate, Apple and its Irish transfer pricing, Google with its double Dutch Irish sandwich transfer pricing, Caterpillar with its Swiss structure, and on and on.

Some of these USMNCs have argued that despite utilizing these accounting maneuvers, they still pay their fair share of taxes (See Apple CEO Tim Cook's comments on 60 Minutes).  Others question whether the USMNCs are actually paying their fair share and whether they are contributing to the overall tax gap.

In contrast to USMNCs trying to shift profits offshore to avoid US Tax, there is one USMNC that is paying its fair share.  Disney, yes that Disney, and despite negative criticism (NY Times article re Disney outsourcing tech jobs to India, and Disney caught in the LuxLeaks scandal), it appears as if Disney is actually paying its true tax liability without utilizing the accounting tricks that other USMNCs utilize to reduce their effective tax rates.

According to this Investopedia article, Disney is paying at or near the US corporate tax rate (35%) of income taxes.  For example, the author states that for 2015, Disney had pre-tax income of $13.9 billion and paid corporate income taxes of $4.4 billion.  The author, David Cay Johnston, also states that Disney earned only 1% of its profits in the U.S. and paid about "1.3% if all the corporate income taxes".

Johnston also states that one reason Disney is paying a higher rate of taxes is that Disney is keeping its Intellectual Property in the U.S. and not transferring the IP to low tax haven subsidiaries.  Johnston also criticizes Disney for not spending its profits in reinvesting in U.S. businesses but in conducting stock buy-backs.

Johnston's main point is that Congress should close the transfer pricing incentive/loophole that has permitted companies (Apple, Google, Pfizer to name only a few) to utilize transfer pricing, earnings stripping and inversions to erode the US tax base and pay less taxes.  Johnston also challenges whether the corporate tax is achieving the goals it was designed to achieve.

Maybe Johnston is correct in having Congress re-visit the utility of the corporate tax structure (a similar criticism of Bob Iger's, the Chairman of Disney).  Or maybe the IRS should be doing a better job at enforcing transfer pricing, inversions, and/or earnings stripping to prevent the USMNCs from shifting taxable income it its foreign base subsidiaries, despite its recent loss in the Medtronic case.

If you have specific and credible information about a company utilizing transfer pricing, inversions and/or earnings stripping to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking the various abusive transfer pricing applications by USMNCs.

More Accounting Tricks to Avoid Paying Tax by U.S. Multinational Corporations

As noted in this blog, the difference between tax evasion and tax avoidance is a fine line.  To assist in drawing the line properly and legally, corporations and individuals employ tax attorneys and accountants to minimize their tax liabilities.

As previously discussed in this blog, the triumvirate of "legal" tax dodging by U.S. Multinational Corporations ("USMNCs") is Inversions, Transfer Pricing and Earnings Stripping.  Another less publicized tool used by accountants of USMNCs is the "stock option loophole".  As the Citizens for Tax Justice ("CTJ") reports, USMNCs have utilized the "stock option loophole" to reduce their taxable income in the amount of $64.6 billion over the past 5 years.

Notable (Top 5) USMNCs which have utilized the stock option loophole include:

USMNC	Stock Option Tax Benefits from 2011-2015
Facebook	$5,665,000
Apple	$4,673,000
Google	$1,951,000
Goldman Sachs Group	$1,775,000
J.P. Morgan Chase & Co.	$1,666,000

The CTJ list documents 310 other companies that have reduced their federal and state corporate income taxes by a combined $64.6 billion dollars over the last 5 years.

What is the "stock option loophole"?  Simply put, it is an accounting mechanism to "track" stock options and to deduct the expense of stock options.  Why is this a loophole? The simple answer is that there is a disparity between the price the employee pays for the stock option and the price the stock options are worth.  For a more technical explanation see this PricewaterhouseCoopers (Accounting Firm) explanation.  Based on the PWC article, the USMNCs deduct this difference between the exercised price and the price their employees paid for the stock on the corporate taxes in the year that the options are exercised.

CTJ questions why the USMNCs are allowed a deduction fro giving their employees a benefit but in reality does not cost the USMNCs anything.  CTJ also states that reversing this may help to minimize the Tax Gap.

If you have specific and credible information about a company failing to pay its tax liabilities, contact our firm about filing an IRS Whistleblower claim to assist the IRS in holding the company liable for the taxes they should be paying.

Transfer Pricing News: Is the IRS doing its job?

As previously addressed in this blog, U.S. Multinational Corporations (USMNCs) are circumventing paying taxes in the United States through Transfer Pricing, Earnings Stripping and Inversions.  This blog also questioned whether tax holidays are just tax breaks for USMNCs that have utilized the three methods to avoid US taxation.

In recent news, (CNN Article), the French government has seized records from Google in an attempt to prove that Google evaded French taxes.  Based on the article, the French anti-corruption officers and tech experts raided the Google offices to ascertain the scope of Google's business in France.

In the same article, CNN points out that Google has recently agreed to pay about £130 million ($185 million) to the U.K. government, so this raid by French authorities may be an attempt to get Google to pay additional taxes in France.

While these events are interesting, the real question here is: why isn't the IRS raiding or requesting additional information from Google to ascertain the extent of its U.S. based business activities, so that the IRS can collect taxes in the U.S. despite Google's extensive use of transfer pricing (Dutch Sandwich strategy)?

Another CNN article points out that the EU is starting to tax corporations despite their use of transfer pricing to minimize taxes in European countries.  The article states that if the EU approves the new rules, companies would have to disclose more detailed records, which would be shared by the EU countries to ensure that all the taxes are being paid.  The article also highlights that EU countries are losing about $70 billion dollars in lost tax revenue from corporations shifting income. Finally the article also discusses other USMNCs that are paying additional taxes to EU countries.

These recent EU actions, as stated above, highlight a glaring weakness to the IRS' approach to transfer pricing; namely, why are EU countries able to get the USMNCs compliance with paying additional taxes and the IRS continues to let the USMNCs avoid taxation?

Perhaps this may be another reason why the House is seeking to impeach the IRS Commissioner.  See this MSN article, stating that the House is seeking to impeach the Commissioner due to the political group targeting scandal.  Maybe the Commissioner should direct his attention to transfer pricing and focus his efforts on collecting from the USMNCs that are not paying their taxes like our European counterparts.

If you have specific and credible information about a company utilizing transfer pricing to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking various abusive transfer pricing applications by USMNCs.